Creeger Brick and Bldg. Supply Inc. v. Mid-State Bank and Trust Co.

• Decision Date: 13 July 1989
• Docket Number: MID-STATE,SEDA--C
• Citation: 560 A.2d 151,385 Pa.Super. 30
• Parties: , 9 UCC Rep.Serv.2d 438 CREEGER BRICK AND BUILDING SUPPLY INC., and Donald H. Creeger and Marjorie Creeger, his wife, Appellants, v.BANK AND TRUST COMPANY,ouncil of Governments, Community Development Corporation, Joint Rail Authority and Local Development Corporation, Appellees. 187 HARRIS. 1988
• Court: Pennsylvania Superior Court

Page 151

560 A.2d 151

385 Pa.Super. 30, 9 UCC Rep.Serv.2d 438

CREEGER BRICK AND BUILDING SUPPLY INC., and Donald H Creeger and Marjorie Creeger, his wife, Appellants, v. MID-STATE BANK AND TRUST COMPANY, SEDA--Council of Governments, Community Development Corporation Joint Rail Authority and Local Development Corporation, Appellees.

187 HARRIS. 1988

Superior Court of Pennsylvania.

Argued Dec. 8, 1988.

Filed May 15, 1989.

Reargument Denied July 13, 1989.

Nora A. Hackett, Pittsburgh, for appellants.

Anthony J. Gerace, Jr., State College, for Mid-State Bank, appellee.

Before WIEAND, OLSZEWSKI and TAMILIA, JJ.

WIEAND, Judge:

The issue in this appeal is whether a borrower has stated a legally cognizable cause of action against a lending institution which, although it has not violated the terms of its loan agreement, has allegedly failed to deal with its borrower in good faith. The trial court held that the averments of the complaint were insufficient to state a cause of action and sustained preliminary objections in the nature of a demurrer. We agree and affirm.

A preliminary objection in the nature of a demurrer admits every well-pleaded fact and all inferences reasonably deducible therefrom. McGaha v. Matter, 365 Pa.Super. 6, 8, 528 A.2d 988, 989 (1987); Pike County Hotels, Corp. v. Kiefer, 262 Pa.Super. 126, 133, 396 A.2d 677, 681 (1978). It tests the legal sufficiency of the challenged complaint and will be sustained only in cases where the pleader has clearly failed to state a claim for which relief may be granted. Mudd v. Hoffman Homes For Youths, Inc., 374 Pa.Super. 522, 524, 543 A.2d 1092, 1093 (1988). If there is any doubt as to whether a claim for relief has been stated, the trial court should resolve it in favor of overruling the demurrer. Mull v. Kerstetter, 373 Pa.Super. 228, 229-230, 540 A.2d 951, 951 (1988).

The complaint in this case discloses that in 1983 Creeger Brick and Building Supply Inc. (Creeger, Inc.) purchased the Mt. Savage Refractories plant in Winburne, Centre County, intending to rehabilitate the facility and reopen a brick manufacturing plant. The principal financing was obtained in the form of a Small Business Administration loan from Mid-State Bank and Trust Company (Mid-State Bank) in the amount of two hundred and fifty thousand ($250,000.00) dollars. The Small Business Administration guaranteed ninety (90%) percent of this loan, which was also secured by a mortgage on the plant and on three residential properties owned by Donald Creeger, the president and sole shareholder of Creeger, Inc., and his wife, Marjorie Creeger. The Creegers contributed two hundred and forty thousand ($240,000.00) dollars of their own money to the venture and borrowed additional funds from the Centre County Commissioners/Department of Community Affairs, SEDA--Council of Governments, Moshannon Valley Development Fund, and the Phillipsburg Association of Commerce. All such loans were subordinated to the principal loan made by Mid-State Bank.

The plant did not become operational until October 1, 1984 and, being seasonal in nature, closed for the winter months on November 22, 1984. It did not begin producing bricks again until February 15, 1985. Because of the delay in attaining full production, Creeger, Inc. suffered a cash shortage. In March, 1985, the business applied for a line of credit from Mid-State Bank in order to obtain needed working capital. The Bank refused to advance further funds. Donald and Marjorie Creeger then requested that one of their residences be released from the lien of the mortgage so that it could be sold. The Bank initially refused, but ultimately agreed to do so upon conditions which the Creegers could not meet. When Creeger, Inc. found a new lender who was willing to purchase ninety (90%) percent of Mid-State Bank's loan and make additional advances, Mid-State Bank refused to assign such an interest. On July 8, 1986, the Small Business Administration notified Creeger, Inc. that Mid-State Bank had demanded, and it had made, payment under its loan guarantee. Thereafter, Creeger, Inc. suffered financial collapse.

Creeger, Inc., as well as Donald and Marjorie Creeger, instituted suit against the lenders who had provided the funds with which they had rehabilitated the plant and started production. In Counts I and II of the Complaint, the plaintiffs alleged that Mid-State Bank was liable to them because, although it had not breached any specific provision of the loan agreement, it had failed to deal with the borrowers in good faith. More specifically, it was alleged, Mid-State Bank had failed to deal with plaintiffs in good faith in the following respects:

(a) Failing to provide [Creeger, Inc.] with a line of credit;

(b) Establishing a commercially unreasonable method in which [Creeger, Inc.] was required to draw upon borrowed funds in the course of acquiring equipment and repairing [Creeger, Inc.'s] plant;

(c) Failing to promptly release it's mortgage against Plaintiff Creeger and Plaintiff Marjorie Creeger, [sic] Pittsburgh property to allow additional working capital to be provided to [Creeger, Inc.];

(d) Failing to cooperate with Plaintiff Creeger and [Creeger, Inc.] in their effort to obtain supplemental financing;

(e) Over-collateralizing it's loan to [Creeger, Inc.];

(f) Failing to advise [Creeger, Inc.] and Plaintiff Creeger of it's demand for payment from the SBA on the SBA's guarantee of [Creeger, Inc.] and Plaintiff Creeger's loan with Defendant Bank;

(g) Taking the position that [Creeger, Inc.] was not able to produce good and marketable brick and advising the subordinated lenders of the same when the same was in fact not true.

Section 205 of the Restatement (Second) of Contracts suggests that "[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." A similar requirement has been imposed upon contracts within the Uniform Commercial Code by 13 Pa.C.S. § 1203. The duty of "good faith" has been defined as "[h]onesty in fact in the conduct or transaction concerned." See: 13 Pa.C.S. § 1201; Restatement (Second) of Contracts § 705, Comment a. Where a duty of good faith arises, it arises under the law of contracts, not under the law of torts. AM/PM Franchise Association v. Atlantic Richfield Co., 373 Pa.Super. 572, 579, 542 A.2d 90, 94 (1988). See also: Clay v. Advanced Computers Applications, Inc., 370 Pa.Super. 497, 505 n. 4, 536 A.2d 1375, 1379 n. 4 (1988), allocatur granted, 518 Pa. 647, 544 A.2d 959 (1988).

In this Commonwealth the duty of good faith has been recognized in limited situations. Most notably, a duty of good faith has been imposed upon franchisors in their dealings with franchisees. See: Atlantic Richfield Co. v. Razumic, 480 Pa. 366, 390 A.2d 736 (1978); Loos & Dilworth v. Quaker State Oil Refining Corp., 347 Pa.Super. 477, 500 A.2d 1155 (1985). It has also been imposed upon the relationship between insurer and insured. See: Gray v. Nationwide Mutual Ins. Co., 422 Pa. 500, 223 A.2d 8 (1966); Gedeon v. State Farm Ins. Co., 410 Pa. 55, 188 A.2d 320 (1963). In Germantown Manufacturing Co. v. Rawlinson, 341 Pa.Super. 42, 491 A.2d 138 (1985), the Superior Court implied that there may also be a duty of good faith in connection with an employer's attempt to recoup theft losses from the wife of an employee who was responsible for the thefts. See also: Baker v. Lafayette College, 350 Pa.Super. 68, 504 A.2d 247 (1986) (employer had limited obligation to act in good faith in reviewing professional teacher's performance).

Conversely, the Supreme Court of Pennsylvania has refused to impose a duty of good faith which would modify or defeat the legal rights of a creditor. Heights v. Citizens National Bank, 463 Pa. 48, 342 A.2d 738 (1975). Other courts have also refused to apply a duty of good faith to alter or defeat the rights of a creditor which have been granted by law or contract. Thus, in Layne v. Fort Carson National Bank, 655 P.2d 856 (Colo.App.1982), the Colorado Court of Appeals held that it was not a breach of the requirement of good faith for a secured lender to refuse a borrower's request for consent to sell collateral. And in Schaller v. Marine National Bank of Neenah, 131 Wis.2d 389, 388 N.W.2d 645 (1986), the Court of Appeals of Wisconsin held that a bank did...